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GTM Solar Summit 2012, Day 2: Notes and Quotes

A review of day two at Greentech Media's Solar Summit 2012.

The Greentech Media Solar Summit 2012 came to a close yesterday, but not before dozens of presenters gave their input on where solar stands today and where it is headed. I recapped day one here, and below I will cover the highlights from day two.

Solar's impact on the gridOne of the debates raging in the solar industry today is related to net metering and whether it is a fair and sustainable system. There was a debate and a panel that discussed the topic, and we should note a few points made by the speakers.

There are costs associated with taking the energy that a distributed solar installation feeds into the grid -- i.e., transmission and maintenance -- that aren't accounted for in net metering. Utilities like San Diego Gas & Electric, which is owned by Sempra Energy(NYSE: SRE), are pushing to have these costs built into solar generators' electricity bills. Right now other ratepayers absorb these costs. But there are benefits as well.

Travis Bradford of The Prometheus Institute for Sustainable Development argued that because solar electricity is generated during peak demand hours, it offsets more expensive peak electricity and actually lowers the cost of electricity overall.

An interesting impact of solar generation on the grid is that peak hours have moved later in the day.

Nothing was decided yesterday, but this is an extremely important policy for solar investors to watch. Net metering will account for an increasing number of solar installations as companies like SolarCity and Sunrun expand in the U.S., and policy changes could have a major impact on the future of the industry.

Investing in solarThere was a panel of analysts from the investment industry that highlighted the morning session. Here are a few key points from their discussion.

Morgan Stanley analyst Smittipon Srethapramote said he is looking for companies with differentiated technology and downstream exposure.

Jefferies analyst Jesse Pichel said that sentiment is at a bottom, and companies that survive will be higher next year.

China was mentioned as the biggest uncertainty in the next year. So far China hasn't let solar manufacturers fail or restructured them, but what they do in the next year will have a huge impact on how stocks perform. "Zombie" companies currently flooding the market with modules would not have survived in Germany or the U.S.

Pichel said, "Taking the German cost structure to the U.S. gets me really excited."

This panel also emphasized that island countries and countries that generate power from oil present the greatest opportunity. Saudi Arabia, Japan, the Philippines, and the Caribbean were mentioned as major opportunities for the industry.

Pichel mentioned that Yingli Green Energy(NYSE: YGE), Trina Solar(NYSE: TSL), and Canadian Solar(Nasdaq: CSIQ) are taking share in Chinese solar exports. This will likely continue, leaving second- and third-tier suppliers in the dust.

Where is Apple(Nasdaq: AAPL)? Funding for projects is challenging, and with billions of dollars on corporate balance sheets, the panel wondered where the corporate money was. Apple was specifically called out because it has plenty of profits to offset with tax equity in solar projects -- something that could be beneficial for both solar and Apple, which would get a better rate of return than it does on treasuries.

I found three key things investors should look for from this panel and others. First, a downstream demand source, which is viewed as not only a great investment opportunity, but also an insulator from demand fluctuations. Second, a differentiated product will be needed to survive, whether it be from cost, efficiency, or an innovative solution for rooftop or utility-scale projects. Finally, the prevailing wisdom is that the big will get bigger and the weak will crumble. Balance sheets matter, and so do big partners backing solar manufacturers.

Recapping GTM Solar Summit 2012The dynamics at a conference like this are interesting because there is a lot of hope, some despair from falling stock prices and sales, and a solemn understanding that a lot of the companies that were there yesterday won't be there next year. Everyone (publicly) thinks that their technology or their company will survive, but as investors it is our job to decipher which ones will emerge from turmoil to dominate an industry everyone at the conference thinks is an incredible opportunity.

For the reasons I've highlighted above, I am sticking with SunPower as my top energy stock for 2012. I am also becoming increasingly confident that a small handful of Chinese manufacturers will emerge, although consolidation and debt levels leave a lot of question marks. My top picks there would be Trina Solar and Canadian Solar, with an honorable mention to Yingli. Lower-tier manufacturers like LDK Solar, JA Solar, and JinkoSolar are in a tough position, and I think we'll see falling sales and margins in coming quarters from the bottom of the solar heap.

I am also coming out of the conference more intrigued by SolarCity's upcoming IPO. With valuations as low as they are and downstream providers viewed as low-risk long-term winners, I think the company presents an attractive opportunity if it hits the market at the right price.

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